If lawmakers get their way, Private Mortgage Insurance (PMI) will become tax-deductible for home loans originated after January 1, 2007. PMI is a requirement for most home loans in which borrowers make a down payment of less than 20%.
The bill has already been passed by Congress and awaits the President's signature before it becomes law.
While the new deduction is restricted to homebuyers whose annual household income does not exceed $100,000, the legislation could impact nearly 50% of all homebuyers, according to a SMR Research study of homes financed in 2005.
Up until now, many homebuyers have used "piggyback" loans in order to avoid paying PMI. A piggyback loan is where the homebuyer obtains two mortgages, a first mortgage for 80% of the purchase price, and a second mortgage for the remaining funds required, outside of the down payment.
Since many homebuyers have chosen a Home Equity Line of Credit (HELOC) as their second mortgage, their required monthly payments have increased significantly as a result of the actions of the Federal Reserve. Today, many homebuyers with a HELOC are now paying more than they would have if they had chosen PMI with their original mortgage.
What does this legislation mean to you?
Under the law, homebuyers will have more financing options available that offer greater tax deductibility and lower monthly payments. This means a homebuyer could potentially afford a more expensive home! In addition, homebuyers could qualify for traditional mortgages rather than the more expensive options they were forced to pursue in the past.